Sunday, 23 March 2008

Time to get hands-on putting a value on carbon

The current spate of declaration by financial institutions looking forward to a world with a value on carbon (and their decisions to set a value for carbon in their own calculations on project viability or to stick to broad principles on carbon which may control the future shape of their portfolios) are the latest confirmation of a world preparing itself for some kind of public policy context to emerge from international negotiations. But perhaps of equal importance is proof that the risks and opportunities from managing exposure to carbon are seen as real and present, not possible and far-away.

To find out performance and ahead of speech-making, a number of challenges face financial institutions. A carbon value helps one understand risk in a future where carbon carries a value, but how do you decide where to invest in carbon intensive projects and where not?

The carbon footprint of the average US resident is multiples that of a Ghanaian, for example. So, in a carbon controlled world, and also a world where the energy access needs of the poor are essential, what other mechanisms will global financial institutions, public and private need to make necessary carbon intensive investments?

How do you know the carbon intensity in your portfolio today? Portfolio measurements of carbon exposure on an agreed methodology are partly complete if at all for most financial institutions. Without that basic knowledge again, how do you know which carbon to add to your portfolio or how much?

After Bali there is a lot of enthusiasm and expectation around possible new sources of funding to come alongside investments to drive down the cost of fixing a cleaner technology project than would have not been considered feasible under usual conditions. This is welcome to be able to help the developing world install energy access, with cleaner, more efficient technology, sooner. But will this be sufficient.

How the analysis taking place at major financial institutions, discussing the use of sovereign funds, the large bilateral development banks in emerging markets and the banks in emerging markets, where most green house gases emitting projects are going to be installed in the next few years? These are the sources of funding in the main.

At the IFC they are chewing over these issues and many more as part of climate change strategy development. They have got some exciting stuff going on - but always looking for other good ideas.

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